If you watched any financial news last year at all, you may have heard the announcer say “Well, the stock market hit a new all-time high today!” In fact, the S&P 500 hit a new market high on 70 separate occasions in 2021. That is one about every three trading days.
To be clear, often a new high is a miniscule movement in prices. Even a CD earning a tenth of a percent hits a new high value every time interest is credited.
Hearing that the market hit a new high can produce at least a couple of different emotions. Perhaps that is good news to you because you’re invested in the market and your accounts have gone up. On the other hand, repeated announcements of new market highs may create some anxiety. You may think “This can’t go on forever. At some point the market is going to correct.”
Let’s look at what happens when the market closes at a new high. What does history show? The period 1926 through the end of 2020 encompasses more than one thousand months. Of those, roughly 30% showed a new high for the market. Researchers at Dimensional Fund Advisors looked at subsequent market performance of the S&P 500 for one-year, three-year and five-year periods after obtaining a new market high. The results are interesting to say the least. After reaching a new high, the S&P 500 closed still higher one year later 82% of the time.
Similarly, after reaching a new high, the S&P 500 closed still higher five years later 78% of the time.
You shouldn’t interpret this as a guarantee of future positive returns. But nor should an investor sit around worrying about a market correction when they hear that the market just hit a new high. It’s just not borne out by the historical evidence.
Dr. David Ashby is a Certified Financial Planner and the retired Peoples Bank Professor of Finance at Southern Arkansas University. He holds degrees in accounting and business administration and a doctorate in finance from Louisiana Tech.